CH-8 - GSB 531 Managerial Finance Chapter 8 Stock Valuation...

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1 GSB 531 Managerial Finance Chapter 8 Stock Valuation D 1 D 2 D 3 D 4 D 5 D 6 Dividends and Stock Valuation Special Cases • Zero Dividend Growth: D 1 =D 2 =D 3 =D •P 0 = D / R
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2 Special Cases • Constant Growth: D 1 = D 0 * (1+g) , D 2 = D 1 * (1+g) = D 0 * (1+g) 2 , •P 0 =D 1 / (R – g), Special Cases • Constant Growth: D 1 = D 0 * (1+g) , D 2 = D 1 * (1+g) = D 0 * (1+g) 2 , •P 0 =D 1 / (R – g), •P 1 = D 2 / (R – g) = D 1 / (R – g) * (1+g) = P 0 * (1+g) , dividend and stock price grow at the same rate g. Special Cases
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3 Non-constant Growth R=10%. After D 3 has been paid, Components of the Required Return R •P 0 = D 1 / (R – g) Î •R = D 1 / P 0 + g • R has two components: dividend yield, and capital gains yield (growth rate of the stock price)
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4 Common and Preferred Stocks • Common Stock: equity without priority for dividends or in bankruptcy. • Preferred Stock: stock with dividend priority over
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CH-8 - GSB 531 Managerial Finance Chapter 8 Stock Valuation...

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